As the market consolidates last year's 30% gains, high-yield/low-beta plays look attractive at these levels.
Interest rates remain below where they began the year, which is supportive for high-yield stocks.
Below are two attractive high-yield plays that are breaking out on possible positive catalysts.
It is nice to start the day with the first good monthly jobs report in 2014. 10-year treasury yields are rising to 2.8% in early trading. However, they are still below the 3% level where they began the year. This has confounded the consensus that predicted rates would rise throughout the year as the Federal Reserve 'tapered' and as the economy strengthen.
I can see treasury yields getting back to 3% over the near term. However, I don't believe they will go much beyond that as I don't see the 3%+ GDP growth projected by many. If the country could only grow an average of 2% since the recession ended in the weakest post recovery in history; what would trigger significantly higher growth as the Fed is pulling back from its extraordinary liquidity measures?
In addition, after last year's 30% rally on the back of around 5% earnings growth; a period of market consolidation is in order. Given this outlook, I continue to believe high-yield/low-beta stocks will outperform the overall market, which I see as delivering less than 10% overall returns in 2014.
Two of my high-yield plays are breaking out recently on possible catalysts and still look attractive here.
Lorillard (NYSE:LO) is up some 10% since I wrote about it a month ago. The trigger for this rise is significant speculation that Reynolds American (NYSE:RAI) is putting together deal to acquire Lorillard and this sector is overdue for consolidation. Wells Fargo believes Lorillard could be worth north of $60 a share.
Although a buyout would be a welcomed event for this shareholder, Lorillard is an attractive investment even as a standalone entity. The shares yield five percent and the company has doubled its payout since coming public in this structure in 2008.
The shares trade at reasonable 15x forward earnings given yield and this valuation is right in line with the overall market multiple. The company's Blu brand is becoming a major player in the burgeoning market for E-cigarettes and analysts expect 6% to 8% revenue growth this year which is above the 4% gain projected for the S&P 500.
I took a significant position in Potash Corp. of Saskatchewan (NYSE:POT) when the breakup of the Russian/Belarussian potash cartel drove the price to under $30 a share in the middle of summer. I did not think this cartel breakup would last as it was not in the best interest of either party over the long term. In addition, this sort of messy tumultuous negotiating tactic is unfortunately standard in that part of the globe.
POT has rallied to over $35 a share on stories that this cartel is in the process of being put back together which would be a significant positive catalyst for higher potash prices. The company is a low cost producer of this fertilizer component.
The shares yield four percent and the company has quadrupled its payout over the past few years. The stock was trading around $44prior to cartel breakup and should gravitate back towards that level should speculation cartel reconfiguration prove right. Finally, the shares just crossed their 200 day moving average for the first time since summer (See Chart).
Disclosure: I am long LO, POT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.